Philippines, China exceptions as bond yields fall—ADB

Bond yields in most emerging East Asian markets continued to track lower from March 1 to May 15, except for the Philippines and China, as investors factored in forecasts of continued slow growth for the global economy, Asian Development Bank’s (ADB) latest Asia Bond Monitor said.

“Most local currency government bond yields, including for 10-year government paper, fell.

The People’s Republic of China (PRC) and the Philippines were exceptions, with yields mostly up,” the report said.

The US Federal Reserve’s cautious approach to keep interest rates steady in its first three meetings in 2016, meanwhile, led to positive inflows in a number of emerging East Asian local currency government bond markets between January and April.

Domestic equity markets and emerging East Asian currencies were mostly stronger over the review period of the ADB, while credit default swap spreads fell, reflecting reduced perceptions of default risk in the region.

“The outlook for emerging East Asian bonds remains mostly benign given still strong fundamentals and interest in the region, however, there are downside risks, including the possibility that quicker than expected US Federal Reserve interest rate hikes trigger a foreign investor pullback from the region,” Shang-Jin Wei, ADB’s chief economist, said.

“At the same time policies to improve the efficiency and transparency of financial markets can help economies in the region remain flexible in the face of external shocks,” he added.

The ADB report noted further stagnation in the global economy and worries about financial instability, along with emerging deflation in emerging East Asia, are other risks.

Local currency bond markets in emerging East Asia continued to grow, rising to over $9.6 trillion at end-March, marking a nearly four percent rise from end-December, and a more than 20 percent climb over the same period the year earlier.

Local currency bond issuance of over $1 trillion in the first quarter was down over two percent from the previous quarter, but was still up 51 percent from the year earlier period.

China’s bond market remained emerging East Asia’s largest, accounting for nearly 68 percent of total bond stock as of end-March 2016.

Local currency government bonds continued to dominate, accounting for nearly 62 percent of total holdings at end-March with corporate bonds less attractive due to their more illiquid nature, the report said.

During the review period, equities rose in all emerging East Asian markets, except for modest declines in Indonesia and Malaysia, while currencies were broadly stronger against the US dollar, with the Republic of Korea won appreciating the most (up five percent during the review period), followed by the Malaysian ringgit, which gained over three percent.

The report’s theme chapter examines the macroeconomic factors affecting sovereign bond yields in emerging Asia, highlighting the role of inflation and the different yield impacts of consumer price index (CPI) and producer price index (PPI) inflation, the importance of domestic liquidity, and the influence of the global economic environment on bond yields.